The peso regained lost grounds on Thursday, Feb. 2, to close at P53.845 vis-à-vis the US dollar, and touching the P53-level for the first time since June 2022.
The stronger local currency took the hint from the US Federal Reserve’s more modest 0.25 basis point rate hike overnight, which will take the steam off the greenback in the next weeks. The Bangko Sentral ng Pilipinas’ (BSP) expected rate increase this month is also positive news for the peso.
The diminishing strength of the US dollar provided support to the peso and other regional currencies. The peso opened strong at P54.42 on Feb. 2 from P54.475 at the close of trading on Feb. 1. It hit a strong level of P53.835 mid-day.
Based on Bankers Association of the Philippines data, the exchange rate’s weighted average stood at P53.955 from P54.591 on Feb. 1. Total volume of trades amounted to $1.620 billion versus $958 million on Wednesday.
Traders and market analysts expect the peso to show some strength for sometime as BSP signals more rate hikes but at a slower pace, similar with the US Fed.
The peso has appreciated from P59 in October last year – which was its lowest rate on record -- due to BSP’s release of significant dollar liquidity. In 2022, the BSP sold more than $14 billion of US dollar stock to prevent the peso from breaching P60.
But with the country’s improving demand, the market also expects the peso to weaken or depreciate slowly in the near term due to the government’s import requirements and the country’s current account deficit.
To balance inflation expectations and economic recovery, and to temper exchange rate pressures while at the same time ensuring growth momentum post-pandemic is intact, the BSP kept a decent rate differential between US rates and central bank rates.
The central bank raised the policy rates by a cumulative 350 basis points (bps) in 2022 to make sure inflation will return to within the target of two percent to four percent this year. BSP Governor Felipe M. Medalla said they could raise the key rate by another 50 bps or more in February and March. The next policy meeting is on Feb. 16.